Not enough already: how to make more of KiwiSaver
Article written by InvestNow – 31st August 2021
Countless studies across the world have revealed retirees share the same number one fear: running out of money.
In fact, global insurance company Allianz Life research found over 60% of US baby boomers fear running out of money in retirement more than death. Similar trends emerged in a recent Australian Allianz survey where pennilessness outranked death as the number one retirement fear.
NZ has a much more generous social security support system for retirees than the US and, arguably, Australia via a universal government pension but the spectre of poverty in retirement still frightens many Kiwis.
According to a 2021 survey by industry body the Financial Services Council (FSC), almost two-thirds of respondents (equating to about 2.5 million New Zealanders) think “they are not on track to have enough money for a happy retirement or be able to afford where they live when they retire”.
Stay adequate NZ
But how much money is enough to fund a happy retirement?
The answer depends, of course, on your definition of happiness, however, the NZ Fin-Ed Centre – a specialist Massey University research unit – has set the bar for retirement adequacy in a series of annual studies dating back to 2012.
In its latest published update in June 2020, the Massey ‘New Zealand Retirement Income Guidelines’ plot an average weekly retiree expenditure ranging from about $586 for a single person on a ‘no-frills’ provincial lifestyle to over $1,420 for a couple living to a ‘choices’ budget in a city.
With the weekly NZ Super payment in 2020 ranging from roughly $423 for singles to $652 for two-person households (rates increased slightly in 2021), even the most frugal retiree couple living in the sticks will need to produce income above the government pension each week to sustain an adequate lifestyle.
Based on the estimated spending gap, the 2020 report says retirees would need to save a lump sum of between $71,000 and $756,000 to meet respective average lifestyle goals above the bare minimum NZ Super payments.
The Massey retirement spending and saving projections depend on a number of fluctuating factors – most notably inflation and investment returns – but the study has another core underlying assumption that retirees also own their homes outright.
Home-ownership, though, is on the slide in NZ, especially among younger cohorts including the so-called Generation X who will begin to hit the current NZ Super eligibility age of 65 in 2030.
“The lower level of home ownership among Generation X will have implications for their retirement plans, and it is important that this be taken into account,” the Massey study says. “… If renting, additional savings are required to cover the higher cost of renting relative to home ownership. Illustrative examples suggest the additional lump sums required range from $199,000 to $340,000. The additional weekly savings required to fund these lump sums are $245 to $420 from age 50, or $80 to $135 from age 25.”
KiwiSaver to the rescue
Both KiwiSaver and the NZ Superannuation Fund (NZS) were established precisely to address the looming retirement savings gap identified by policy-makers early this century.
Now valued at almost $60 billion, NZS was designed to defray some of the future taxpayer cost of the government pension with draw-downs from the fund due to start in the 2035 year.
By contrast, KiwiSaver enabled individual New Zealanders to boost their retirement income potential by investing in financial markets via well-regulated and cost-controlled schemes.
Since inception in 2007, KiwiSaver has grown to house over 3.1 million members and more than $80 billion, earning its reputation as the go-to place to start planning for retirement.
And, as the Massey report shows, the earlier people start saving for retirement, the easier it is to achieve their goals over the long term.
For example, the Fin-Ed Centre survey estimates a single-person aspiring to a high-end ‘choices’ retirement in a city would have to put aside $300 each week from age 25 while the figure more than triples to $926 for someone starting the same savings journey age 50.
Clearly, the KiwiSaver long-term advantage lies with younger generations but members of all ages should begin by calculating how much income they would like to achieve in retirement beyond the baseline NZ Super pension.
While the Massey report provides a rough general guide, the government financial literacy website Sorted also has a range of useful tools to personalise retirement income estimates.
With a target in mind, it’s much easier to plan and implement the next stages of retirement planning, which for most New Zealanders now hinge on KiwiSaver.
Aside from the obvious first step of joining KiwiSaver (or not opting-out from auto-enrolment), there are a few basic hygiene factors to put in place, including:
- make sure your provider has your correct prescribed investor rate (PIR) – this determines the tax on investment returns;
- decide on your contribution level – the minimum amount is 3% of pre-tax income (that is matched with 3% from employers) but members can put in up to 10% of their salary/wages; and,
- ensure your personal contributions each year amount to at least $1,043 (or $1,042.86 to be exact) to earn the government ‘member tax credit’ top-up of about $521.
Choice moments
However, KiwiSaver also calls on members to make important investment choices that demand a higher level of financial literacy.
Under current rules, auto-enrolled KiwiSaver members will be shunted off to a conservative fund operated by one of the nine default providers: as of December this year, the default fund switches to a balanced option with only six providers sharing the job.
Rather than leave the investment decision up to the government, most KiwiSaver members have at least chosen their own scheme. According to the 2020 Financial Markets Authority KiwiSaver Annual Report, only 380,000 or so members are considered pure default members – the rest largely fall under the ‘active choice’ label.
Whether all ‘active choice’ members have made the right investment decision is another question.
Most KiwiSaver providers including InvestNow offer a range of diversified funds spanning ‘conservative’ to ‘growth’. Investors are usually advised to select a fund based on a ‘risk profile’, which incorporates factors such as age, current financial status, savings goals and personality type.
There are online guides, such as the Sorted Investor Calculator, that are available to help investors find out what type of investor they are, by answering a set of questions. Once investors figure out what their risk profile is, they can then choose what funds to invest in. Like most other KiwiSaver schemes’, with the InvestNow KiwiSaver Scheme you can select a diversified fund to match your risk profile.
“And we have taken that a huge leap further, in favour of our customers,” says InvestNow General Manager, Mike Heath.
“Not only can you select a single diversified fund that matches your risk profile, but you can combine a number of them so your KiwiSaver is not all tied up with one manager. Imagine being able to invest in growth funds from Milford and Fisher Funds and Smartshares, all in the one KiwiSaver scheme – you can with the InvestNow KiwiSaver Scheme!”
InvestNow KiwiSaver Scheme Diversified Fund options:
However, before choosing any funds, investors should do their research on the funds and fund manager options that are available, so they can confidently pick the options that are right for them.
“Knowing your risk profile, and choosing your funds isn’t the only important steps to take,” according to Heath.
Heath says KiwiSaver members should review their investment choices at least once a year or more frequently as life circumstances change.
“We send InvestNow KiwiSaver Scheme members an email each year reminding them to review their investment settings – there are many reasons why they may want to change,” he says. “And that could be as mundane as resetting your PIR if your income has changed, or moving to a lower-risk fund if you’re about to use KiwiSaver to help buy a first home.”
Despite its multiple use-cases (first-home, emergency funding under hardship etc), KiwiSaver’s main purpose will always be to help New Zealanders achieve a better standard of living in retirement than the government pension alone provides.
“At heart, KiwiSaver is a retirement savings vehicle but we think investors should have greater choice and flexibility in how they travel,” Heath says. “And if KiwiSaver members make better decisions now there’s much less danger of running out of fuel when they retire.”
Check out the InvestNow KiwiSaver Scheme range of Managed Funds. Including our large range of easy-select diversified funds for you to choose from. Our range of diversified funds includes funds from Milford, Fisher Funds, Smartshares, Harbour, Hunter, Mint, Pathfinder, AMP Capital & Castle Point.
Not enough already: how to make more of KiwiSaver
Article written by InvestNow – 31st August 2021
Countless studies across the world have revealed retirees share the same number one fear: running out of money.
In fact, global insurance company Allianz Life research found over 60% of US baby boomers fear running out of money in retirement more than death. Similar trends emerged in a recent Australian Allianz survey where pennilessness outranked death as the number one retirement fear.
NZ has a much more generous social security support system for retirees than the US and, arguably, Australia via a universal government pension but the spectre of poverty in retirement still frightens many Kiwis.
According to a 2021 survey by industry body the Financial Services Council (FSC), almost two-thirds of respondents (equating to about 2.5 million New Zealanders) think “they are not on track to have enough money for a happy retirement or be able to afford where they live when they retire”.
Stay adequate NZ
But how much money is enough to fund a happy retirement?
The answer depends, of course, on your definition of happiness, however, the NZ Fin-Ed Centre – a specialist Massey University research unit – has set the bar for retirement adequacy in a series of annual studies dating back to 2012.
In its latest published update in June 2020, the Massey ‘New Zealand Retirement Income Guidelines’ plot an average weekly retiree expenditure ranging from about $586 for a single person on a ‘no-frills’ provincial lifestyle to over $1,420 for a couple living to a ‘choices’ budget in a city.
With the weekly NZ Super payment in 2020 ranging from roughly $423 for singles to $652 for two-person households (rates increased slightly in 2021), even the most frugal retiree couple living in the sticks will need to produce income above the government pension each week to sustain an adequate lifestyle.
Based on the estimated spending gap, the 2020 report says retirees would need to save a lump sum of between $71,000 and $756,000 to meet respective average lifestyle goals above the bare minimum NZ Super payments.
The Massey retirement spending and saving projections depend on a number of fluctuating factors – most notably inflation and investment returns – but the study has another core underlying assumption that retirees also own their homes outright.
Home-ownership, though, is on the slide in NZ, especially among younger cohorts including the so-called Generation X who will begin to hit the current NZ Super eligibility age of 65 in 2030.
“The lower level of home ownership among Generation X will have implications for their retirement plans, and it is important that this be taken into account,” the Massey study says. “… If renting, additional savings are required to cover the higher cost of renting relative to home ownership. Illustrative examples suggest the additional lump sums required range from $199,000 to $340,000. The additional weekly savings required to fund these lump sums are $245 to $420 from age 50, or $80 to $135 from age 25.”
KiwiSaver to the rescue
Both KiwiSaver and the NZ Superannuation Fund (NZS) were established precisely to address the looming retirement savings gap identified by policy-makers early this century.
Now valued at almost $60 billion, NZS was designed to defray some of the future taxpayer cost of the government pension with draw-downs from the fund due to start in the 2035 year.
By contrast, KiwiSaver enabled individual New Zealanders to boost their retirement income potential by investing in financial markets via well-regulated and cost-controlled schemes.
Since inception in 2007, KiwiSaver has grown to house over 3.1 million members and more than $80 billion, earning its reputation as the go-to place to start planning for retirement.
And, as the Massey report shows, the earlier people start saving for retirement, the easier it is to achieve their goals over the long term.
For example, the Fin-Ed Centre survey estimates a single-person aspiring to a high-end ‘choices’ retirement in a city would have to put aside $300 each week from age 25 while the figure more than triples to $926 for someone starting the same savings journey age 50.
Clearly, the KiwiSaver long-term advantage lies with younger generations but members of all ages should begin by calculating how much income they would like to achieve in retirement beyond the baseline NZ Super pension.
While the Massey report provides a rough general guide, the government financial literacy website Sorted also has a range of useful tools to personalise retirement income estimates.
With a target in mind, it’s much easier to plan and implement the next stages of retirement planning, which for most New Zealanders now hinge on KiwiSaver.
Aside from the obvious first step of joining KiwiSaver (or not opting-out from auto-enrolment), there are a few basic hygiene factors to put in place, including:
- make sure your provider has your correct prescribed investor rate (PIR) – this determines the tax on investment returns;
- decide on your contribution level – the minimum amount is 3% of pre-tax income (that is matched with 3% from employers) but members can put in up to 10% of their salary/wages; and,
- ensure your personal contributions each year amount to at least $1,043 (or $1,042.86 to be exact) to earn the government ‘member tax credit’ top-up of about $521.
Choice moments
However, KiwiSaver also calls on members to make important investment choices that demand a higher level of financial literacy.
Under current rules, auto-enrolled KiwiSaver members will be shunted off to a conservative fund operated by one of the nine default providers: as of December this year, the default fund switches to a balanced option with only six providers sharing the job.
Rather than leave the investment decision up to the government, most KiwiSaver members have at least chosen their own scheme. According to the 2020 Financial Markets Authority KiwiSaver Annual Report, only 380,000 or so members are considered pure default members – the rest largely fall under the ‘active choice’ label.
Whether all ‘active choice’ members have made the right investment decision is another question.
Most KiwiSaver providers including InvestNow offer a range of diversified funds spanning ‘conservative’ to ‘growth’. Investors are usually advised to select a fund based on a ‘risk profile’, which incorporates factors such as age, current financial status, savings goals and personality type.
There are online guides, such as the Sorted Investor Calculator, that are available to help investors find out what type of investor they are, by answering a set of questions. Once investors figure out what their risk profile is, they can then choose what funds to invest in. Like most other KiwiSaver schemes’, with the InvestNow KiwiSaver Scheme you can select a diversified fund to match your risk profile.
“And we have taken that a huge leap further, in favour of our customers,” says InvestNow General Manager, Mike Heath.
“Not only can you select a single diversified fund that matches your risk profile, but you can combine a number of them so your KiwiSaver is not all tied up with one manager. Imagine being able to invest in growth funds from Milford and Fisher Funds and Smartshares, all in the one KiwiSaver scheme – you can with the InvestNow KiwiSaver Scheme!”
InvestNow KiwiSaver Scheme Diversified Fund options:
However, before choosing any funds, investors should do their research on the funds and fund manager options that are available, so they can confidently pick the options that are right for them.
“Knowing your risk profile, and choosing your funds isn’t the only important steps to take,” according to Heath.
Heath says KiwiSaver members should review their investment choices at least once a year or more frequently as life circumstances change.
“We send InvestNow KiwiSaver Scheme members an email each year reminding them to review their investment settings – there are many reasons why they may want to change,” he says. “And that could be as mundane as resetting your PIR if your income has changed, or moving to a lower-risk fund if you’re about to use KiwiSaver to help buy a first home.”
Despite its multiple use-cases (first-home, emergency funding under hardship etc), KiwiSaver’s main purpose will always be to help New Zealanders achieve a better standard of living in retirement than the government pension alone provides.
“At heart, KiwiSaver is a retirement savings vehicle but we think investors should have greater choice and flexibility in how they travel,” Heath says. “And if KiwiSaver members make better decisions now there’s much less danger of running out of fuel when they retire.”
Check out the InvestNow KiwiSaver Scheme range of Managed Funds. Including our large range of easy-select diversified funds for you to choose from. Our range of diversified funds includes funds from Milford, Fisher Funds, Smartshares, Harbour, Hunter, Mint, Pathfinder, AMP Capital & Castle Point.
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